Similarity in Demand Structures and Foreign Direct Investment in the Food and Beverage Industry

I study the relationship between demand similarity and foreign direct investment in the food and beverage industry. My regression specification includes a measure of similarity in income per capita to proxy for similarity in demand. Using firm-level greenfield investment data, I find a significant effect of income similarity along the intensive and extensive margin of foreign direct investment. My findings show that investment activities are more intense between countries with similar income per capita. The similarity effect is larger for the intensive margin, implying that it is not only more likely that an investment is realized between countries with similar income per capita, but also that such a project involves a considerable larger investment and creates more jobs. Although I find evidence for heterogeneity in the similarity effect, all coefficient estimates have a negative sign. Moreover, distinguishing between types of foreign direct investment, I find that the similarity effect is mainly relevant for manufacturing projects. These results show that demand for quality is an important determinant of cross-border investment activities in the food and beverage industry.